Matthew Rady

As record-low interest rates punish cash returns, innovative protected retirement strategies are emerging as a new defensive solution for retirees, states Allianz Retire+.

Key points:

• Term deposit rates have fallen 96% since the 2008-09 Global Financial Crisis (GFC) to just 30 basis points (RBA, April 2021)^[1].
• A pre-GFC retiree with $1.25 million in term deposits could have generated $100,000 of annual income. Today, that same retiree can potentially generate only $3,750 of annual income (RBA, April 2021)^[2].
• A retired couple today would need almost $21 million invested in cash to fund a comfortable standard of living at the current term deposit rate (RBA, April 2021; ASFA Comfortable standard of living, Dec 2020)^[3].
• Protected retirement strategies as an alternative to traditional defensives can potentially provide substantially higher returns than current cash & term deposit rates, with minimal downside risk.

Financial Advisers grappling with record-low returns on cash should consider alternative defensive strategies that can boost returns and minimise risk in retirement portfolios.

Allianz Retire+ research shows, retirees can potentially earn up to seven times the current term deposit rate through a protected retirement strategy, while at the same time limiting their maximum downside to -0.8% per annum^[4].

“Retirement strategies that offer downside protection have traditionally been used in the equity component of portfolios to safeguard against sharemarket volatility,” says Allianz Retire+ CEO Matthew Rady. “They haven’t been thought of as an approach that can potentially deliver higher returns than traditional defensive assets.”

Rady says in this environment retirees and their advisers need a new approach to generate returns in excess of cash. “With the cash rate near zero, retirees who have a lot of savings in cash risk going backwards financially in real terms and having a significantly lower standard of living this decade, compared to a pre-GFC environment.”

Rolling over one-year term deposits – a practice favoured by some retirees – is particularly problematic. “Those who persist with this strategy may be in for further pain,” says Rady. “Too many retirees feel there is no alternative and have automatically rolled over their term deposits into lower rates.”

Many retirees favour cash because they want the peace-of-mind that protection and return certainty offers.

The downside in the current environment is minuscule returns. From a high of 8.25% after the GFC, term deposit rates have fallen to just 0.3% (RBA, 6 April 2021)^[5]. After accounting for inflation, the real return on cash is negative. (RBA, March quarter, 2021)^[6].

“With interest rates at unprecedented lows, and unlikely to head substantially higher anytime soon, retirees need the defensive component of their portfolio to work harder for them,” says Rady.

“They need to ask: how can I get a better return than I’m currently getting from my term deposits or cash, while ensuring there is still sufficient downside protection for my retirement savings? We believe protected retirement strategies that are backed by a life company are part of the answer.”
Rady gives the example of a 68-year-old retiree who inherited $300,000 after the loss of a parent, and wants that money protected and separated from other assets.

If that $300,000 was invested in a term deposit over seven years (from 2014 to 2020), the ending balance would be $353,434, with the cumulative return 17.81%. (RBA, April 2021)^[7].

Hypothetically, and using past performance data, had the retiree utilised a protection retirement product, exposed to market linked returns the ending balance on that same seven year period may have been $384,285, with the cumulative return 28.1% (Allianz Retire+ assumptions)^[8] excluding taxes and net of fees.
Rady says this case example utilising a 0% protection ‘Floor’ strategy within a 7-year protected retirement product highlights the benefits of incorporating protected retirement strategies into a portfolio, to potentially lift returns in a low-rate environment.

“If an adviser is looking for a higher rate than say a 0.3% p.a return, a maximum potential return of 2.15% per annum on a 0% protection Floor option might be worth consideration.”

Rady cautions that there is a potential limited downside risk involved. Returns are generated from having linked exposure to local and international shares. In the example of using a 0% protection ‘Floor’, if linked markets were to post 0% or negative returns, investors could be subject to a maximum downside loss of 0.8% in a year (Allianz Retire+)^[9].“A protected retirement strategy is not risk-free, nor is it a cash or term deposit. It’s a completely different longer-term product, with sharemarket linked returns. We don’t see this as a complete portfolio solution, nor is it a replacement for fixed income in a defensive portfolio. It’s rather one component of a good overall retirement strategy”.

Rady says it’s definitely worth advisers assessing the cash component of their defensive portfolios and assessing a retiree’s risk appetite to alternatives in this environment “if a retiree is prepared to weather a potential downside loss of 0.8% per annum, the flip side potential could be up to seven times the current term deposit rate. That could make a huge difference to returns on part of their defensive allocation over time – and to their standard of living.”.

He believes protected retirement strategies solve several problems. “People in retirement get peace of mind from having downside protection, which is the sense of safety they feel in cash, but potentially a higher return than cash, generated from having exposure to local and international shares. In this market, every extra point of return counts.”

Rady also acknowledges how important financial advice is, particularly when helping retirees navigate a challenging low yield environment. “Financial advice is always important, and especially so when using protection strategies as a component of a defensive portfolio”.-ENDS-

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[1] Reserve Bank of Australia: Retail deposit and investment rates; Banks’ term deposits ($10000); 1 year, at 6 April 2021 [and using July 2008 term deposit rate of 8.25%]. https://www.rba.gov.au/statistics/tables/?v=2021-04-30-07-17-25#interest-rates
[2] Reserve Bank of Australia: Retail deposit and investment rates; Banks’ term deposits ($10000); 1 year, at 6 April 2021. Assumed $1.25m multiplied by the July 2008 term deposit rate of 8.25% (equals $100,000), compared to $1.25m multiplied by the current 0.30% term deposit rate (equals $3,750).
[3] Assumes average term deposit rate of 0.3%. Uses Association of Australian Superannuation Funds (ASFA) Retirement Standard of $62,562 in annual living costs for a retired couple who want a “comfortable lifestyle”. ASFA standard at December quarter 2020. https://moneysmart.gov.au/glossary/asfa-retirement-standard
[4] Based on Allianz Retire+ Future Safe seven-year investment interval, 0% floor, 50/50 investment into S&P/ASX 200 Total Return (3% Cap) and MSCI World Net in AUD (2.9% Cap) indexes at March 2021. Net of 0.80% pa fee. This example uses past-performance data, which is not a reliable indicator of future performance and is no guarantee of future returns. The returns on the Future Safe product issued by Allianz Australia Life Insurance Limited ABN 27 076 033 782, AFSL 296559 (Allianz Retire+) which are used in this example are subject to a number of variables including investor elections, market performance and other external factors, and may differ from this example. Prior to making an investment decision, investors should consider the Product Disclosure Statement (PDS) which is available on our website (www.allianzretireplus.com.au).
[5] Reserve Bank of Australia: Retail deposit and investment rates; Banks’ term deposits ($10000); 1 year, at 6 April 2021.
[6] Reserve Bank of Australia: year-ended percentage change for the Consumer Price Index (excluding volatile items), for March quarter 2020/21. https://www.rba.gov.au/inflation/measures-cpi.html#quarterly
[7] Reserve Bank of Australia: Retail deposit and investment rates; Banks’ term deposits ($10000); 1 year, at 6 April 2021.
[8] Historical Allianz Retire+ Future Safe performance. Shows the annualised seven-year return subject to the historical cap for the 0% floor option, rolling monthly. 50/50 investment into S&P/ASX 200 Total Return and MSCI World Net in AUD indexes. Net of 0.80% pa fee. Based on Allianz Retire+ Future Safe seven-year investment interval, 0% floor, 50/50 investment into S&P/ASX 200 Total Return (3% Cap) and MSCI World Net in AUD (2.9% Cap) indexes at March 2021. Net of 0.80% pa fee. This example uses past-performance data, which is not a reliable indicator of future performance and is no guarantee of future returns. The returns on the Future Safe product issued by Allianz Australia Life Insurance Limited ABN 27 076 033 782, AFSL 296559 (Allianz Retire+) which are used in this example are subject to a number of variables including investor elections, market performance and other external factors, and may differ from this example.
[9] Allianz Retire+ Future Safe seven-year investment interval, 0% floor, 50/50 investment into S&P/ASX 200 Total Return (3% Cap) and MSCI World Net in AUD (2.9% Cap) indexes at March 2021. Net of 0.80% pa fee. Based on Allianz Retire+ Future Safe seven-year investment interval, 0% floor, 50/50 investment into S&P/ASX 200 Total Return (3% Cap) and MSCI World Net in AUD (2.9% Cap) indexes at March 2021. Net of 0.80% pa fee. This example uses past-performance data, which is not a reliable indicator of future performance and is no guarantee of future returns. The returns on the Future Safe product issued by Allianz Australia Life Insurance Limited ABN 27 076 033 782, AFSL 296559 (Allianz Retire+) which are used in this example are subject to a number of variables including investor elections, market performance and other external factors, and may differ from this example.

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The main challenge is to feel confident in retirement.

The positive impact of expert financial advice on the confidence of a person about to enter or in retirement must never be underestimated. In fact, more can be done to help educate and guide a greater proportion of non-advised Australians to receive the knowledge, confidence and satisfaction levels of those already in an advice partnership.

This is one of the key findings of new research conducted by Allianz Retire+, which yesterday released fresh insight into the hearts and minds of prospective and current retirees across the nation^[1]. The research surveyed Australians looking to retire in the next seven years and those currently in retirement.

The results are encouraging for the financial advice profession in Australia. It shows that a high 94 per cent of those Australians who have sought expert advice are satisfied with their advice and have a healthy trusted relationship with their advisers. 63% of this cohort indicated they have been with their adviser for over five years, and one in two has recommended their services, citing a good relationship as the main driver.

“The results emphasise the important role trusted adviser relationships have in helping Australians really retire” said Allianz Retire+ CEO Matthew Rady. “The numbers show a fundamental difference that quality advice makes to the confidence of a retiree. We can also see that advisers should be encouraged by the results as a strong indicator of an existing and growing value proposition.” 

Advice adoption rates

However, the task towards the conversion of more Australians gaining quality advice is real, with only one in four actively seeking advice from experts. While around half of the respondents believe financial advisers have valuable expertise and deliver a useful service, over 50% of those aged 65+ indicated they would not use an adviser. Why? Cited reasons include feeling financially capable on their own, not having enough funds to invest and the perceived (high) cost of advice.   

Of those that do use a financial adviser, over half cited the desire to know more about their financial position and confirmation they were doing enough for retirement. When selecting an adviser, trust was the strongest driver of choice; followed by facilitating the best (tailored) advice; the ability to explain things simply; and reliability. A person’s gender also appears to influence what retirees seek in an adviser, with women seeking support and care, while male respondents favoured financial benefit.

Financial decision making 

The findings also suggest that financial literacy and advice accessibility may be key barriers in the adoption of more Australians seeking quality advice:

• 79% of Australian retirees state they are responsible for their finances and it’s important for them to feel in control of their money, yet;
• Only a mere 44% are feeling secure in their current financial position; and

The response from current retirees is to assume a frugal and conservative retirement investment approach to fund their retirement (75%).

Sources of income in retirement

Interestingly, nearly half of all respondents cited the age pension as part of their retirement plan. Over a quarter also listed having a superannuation fund and shares as sources of income. The adoption of other types of investments were significantly lower, including managed funds, self-managed super funds, annuities and investment properties.

Rady said:“The main challenge we believe is to feel confident in retirement. These results indicate more can be done to help Australians become financially literate, benefit from an advice partnership and feel confident with their retirement position.” 

“With 1,000 Australians retiring a day, there has never been a more pressing need to undertake this research and gain a deeper appreciation of the complexities and barriers at play. We believe the results gained from this research add to our understanding of the important role advisers play in setting up people for a happy retirement”. 

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[1] Based on Allianz Retire+ survey in 2019 of 702 current and prospective retirees across Australia.

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Future Safe was purpose-designed from the point of view of the customer, following detailed market research with Australian financial advisers and retirees. The research identified key challenges within the retirement community and the product features that might address these. 

Allianz Retire+ Chief Executive, Matthew Rady said, “We’re delighted Lonsec has not only reviewed our first product, Future Safe, but has awarded it a rating of ‘Recommended’. This is an extremely encouraging outcome which clearly demonstrates the quality of the product, its accessibility and affordability for advisers and their clients, and the capability of the combined backing of Allianz and PIMCO.” 

Allianz Retire+ Head of Distribution, Caitriona Wortley continued, “We’re excited that Lonsec has issued a positive report so soon after Future Safe’s launch. This will really help us deliver on our mission to provide greater certainty to Australian retirees.” 

Future Safe is a seven-year investment product, with inbuilt flexibility, issued by a life insurance company. It provides a simple way for clients to access the returns of the sharemarket with the certainty of a range of outcomes. At the commencement of a policy clients, in consultation with their adviser, select either one or a combination of fixed rate, market-linked investments and protection options to suit their needs. 

Each market-linked option is made up of a ‘Cap’ and a ‘Floor’, allowing clients to decide their range of returns up front and limit potential losses. 

Rating Future Safe ‘Recommended’ in its review, Deanne Baker, Lonsec’s co-Head of Manager Research stated: “Lonsec considers Future Safe to be a thoughtfully considered and well-designed product, that may assist in overcoming a major challenge facing retirees; sequencing risk. Future Safe provides investors a vehicle to participate in market-linked returns within inbuilt protection and flexibility, at a reasonable, and importantly, transparent cost and market leading with respect to total cost transparency in the retirement space. Lonsec is comforted in the heavy involvement of both Allianz (one of the world’s largest insurers in a highly regulated industry) and PIMCO (one of the world’s largest fixed income managers).”

*The Lonsec Rating (assigned March 2019) presented in this document is published by Lonsec Research PTY Ltd ABN 11 151 658 561 AFSL 421 445. The Rating is limited to “General Advice” (as defined in the Corporations Act 2001 (Cth) and based solely on consideration of the investment merits of the financial product. Past performance information is for illustrative purposes only and is not indicative of future performance. It is not a recommendation to purchase, sell or hold Allianz Retire+ products, and you should seek independent advice before investing in this product. The Rating is subject to change without notice and Lonsec assumes no obligation to update the relevant documents following publication. Lonsec receives a fee from the Fund Manager for researching the product using comprehensive and objective criteria. For further information regarding Lonsec’s ratings methodology, please refer to the website at: http://www.lonsecresearch.com.au/research-solutions/our-ratings

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Matt Rady

Allianz Retire+ Powered by PIMCO (“Allianz Retire+”) has announced Matthew Rady as its CEO and three industry experts as independent non-executive directors.

Patria Mann, David Plumb (who will serve as Chairman) and Hon. Bernie Ripoll will join the Board as independent non-executive directors.

This announcement follows the launch of Allianz Retire+ in May, a new business that combines the expertise of Allianz’s global life insurance business with PIMCO’s global investment management experience to deliver the next generation of retirement income solutions.

In his new role, Mr. Rady will be responsible for leading Allianz Retire+’s business in Australia, including launching its first retirement income product later this year. He will assume his responsibilities immediately and Adrian Stewart, Head of PIMCO Australia and New Zealand, who has been acting as interim CEO, will become a non-executive director to the Board.

Mr. Stewart said: “Matt is an exceptional executive with the industry expertise, client orientation and leadership skills to position Allianz Retire+ for long-term success.”

Mr. Rady said: “It’s an honour to be chosen as CEO and to represent and lead such an exceptional business. Along with our talented team, I look forward to helping our clients meet their unique retirement income objectives.”

“As the demand for retirement income continues to develop, Allianz Retire+ is well-positioned to deliver best-in-class retirement income solutions and services,” he added.

Mr. Plumb, Chairman of the Board, said: “The Board includes diverse attributes that will enable it to oversee and guide management – deep financial and commercial acumen and a strong mix of skills and industry experience.”

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Reporting directly to Chief Executive Officer, Andrew Walsh, Mr Rady will be responsible for leading IRESS’ Financial Markets business globally.

The Financial Markets business is a core division within IRESS providing market data and trading software and services to institutional and retail participants, representing professional and private end users. IRESS operates in Australia, New Zealand, Singapore, Canada, South Africa and the United Kingdom.

Announcing the appointment today, Mr Walsh said the new role would be focused on growing IRESS’ financial markets business globally.

“Matthew is an outstanding executive with impressive international and local experience. The breadth and depth of this experience, including in financial services product innovation and technology-enabled, customer-focused roles, makes him ideally suited to this position and will bring an invaluable perspective to our existing business delivery and global growth.”

“The new role is a strategic response to our global growth plans and the opportunities being presented by this.”

Mr Rady joins IRESS from Macquarie Group where he spent 18 years as Executive Director of the Banking and Financial Services Group. Mr Rady was responsible for the development and growth of a range of businesses, with roles including accountability for product delivery, business strategy, acquisition and integrations, and management of international operations. Most recently, Mr Rady was head of Macquarie’s North American Banking and Financial Services Group, based in Toronto.

Mr Rady said that he was delighted to be joining the IRESS team.

“The company has gone through significant growth internationally over the past 12 months and I am excited about the opportunity to support existing clients as well as executing IRESS’ overall growth strategy in key markets.”

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